Here we go again. Congress’ favorite game of chicken, the federal debt limit, has returned, set to be reinstated on Aug. 1. For the tenth time in the past decade, the U.S. will be within months of defaulting on its obligations. As usual, politicians are making demands that leverage the financial credibility of the country, threatening to drive us over the fiscal cliff, expecting they can hit the brakes at the last possible moment.
But this time, we don’t know how much runway Congress has to play with. Last week, Treasury Secretary Janet Yellen and the Congressional Budget Office echoed the Bipartisan Policy Center’s warning that due to atypical cash flows associated with COVID-19 relief spending and the evolving economic recovery, it’s difficult to provide a narrow estimate for when the Treasury would default on its obligations — known as the “X Date.” Normally, the range would be down to a few weeks by now, providing Congress with a clear view, but current projections are still at a wide multiple-month window for the fall. We’re about to start the race at midnight with no headlights, and neither side is backing down.
Senate Minority Leader Mitch McConnell says Republicans won’t provide the votes necessary to further extend the debt limit, while others in his party have demanded that it be paired with equal spending reductions. Democrats insist they won’t negotiate or accept demands from the opposition but may not be able to tackle the issue along party lines. Based on history, we might expect another eleventh-hour deal in which both sides shake hands and agree to do it again next year. But with the full faith and credit of the United States on the line, waiting for one side to blink is a dangerous strategy.
In these conditions, it’s time for both parties to take the off-ramp. While the debt limit was once viewed by many as an opportunity to force action on the country’s unsustainable fiscal path, that illusion should be long dead. Since 2012, debt limit extensions have most often ridden on legislation that actually increased deficits.
As bipartisan infrastructure negotiations and Democratic spending ambitions slog on through the summer, time is of the essence to resolve the debt limit problem. In modern history, the U.S. has never defaulted on its obligations, an outcome most commonly associated with banana republics.
Because of this risk, Democrats have long called to abolish the debt limit altogether and have reintroduced legislation to do so. Those bills are simple and have a clear rationale — they also have a grand total of zero Republican co-sponsors.
Some have called for replacing the debt limit with automatic spending cuts to restore fiscal health. The battle-hardened veterans of past fights will recall the temporary use of that strategy back in 2011 — but the majority of those “sequester” cuts have since been reversed. And proponents of that approach will find no support from Democrats for a rerun.
So, how do lawmakers thread the needle?
The way forward must eliminate the debt limit brinkmanship that endangers our economy. It should also replace the recurring hand-waving and shouting over $28 trillion of debt with a structured debate of substantive proposals to address the underlying imbalance between taxes and spending. As the old saying goes, “Put the legislative text where your mouth is.”
In the coming months, Congress has a chance to defang the debt limit forever by tying it to the budget process and providing an opportunity for serious consideration of debt reduction proposals. Specifically, if Congress fails to do its job and pass a fiscally responsible budget resolution each April, the president would be empowered to suspend the debt limit until the end of the following fiscal year. That action would have to be accompanied by a specific debt reduction proposal — think tax increases and spending cuts.
Importantly, the debt limit suspension and debt reduction proposal would advance separately. The suspension would take effect immediately, unless a supermajority in both chambers of Congress vote to override (highly unlikely), while the president’s proposal would jumpstart a deliberative process to consider, and ultimately vote on, debt reduction legislation. On the latter, no outcome would be guaranteed — policymakers must still agree to the tough choices needed to get our fiscal house in order — but a purposeful debate is far preferable to today’s fiasco.
Luckily, behind the scenes, bipartisan support is growing for this type of solution, and it has been drafted into legislation. Party leaders are understandably not eager to embrace it at the outset of negotiations, lest they appear “chicken.” But members on both sides of the aisle are acknowledging that enough is enough — the debt limit has failed as a fiscal tool, and the political battles are both predictable and dangerous. Nobody’s driven the car over the cliff yet. Let’s keep it that way for good.
Shai Akabas is the economic policy director at the Bipartisan Policy Center and leads the organization’s federal debt limit “X Date” projections.